What do you think about Gibson's paradox? i.e. that higher interest rates will pull up inflation. agree? disagree? Investment in the US is not dissimilar to consumption in my view and thats what is needed to resolve supply etc
I don't believe Gibson's paradox holds up unless there is a gold standard and market interest rates. When Alfred Gibson gathered his empirical evidence to come to his conclusion on interest rates and inflation, he was looking over data that was influenced by market interest rates and the gold standard. Now we have the Fed set interest rates for the market and no tether to gold what-so-ever. I think our best guide to the current inflation is the mid-70s through the early 80s, when there was no longer a connection to gold and the Fed set interest rates.
Gibson's paradox is a correlative observation that does not really explain anything. It's crucial to understand that inflation is not directly an interest rate phenomenon. Inflation is the increase in money supply. The increase in the money leads to a devaluation of money. The decrease in money value leads lenders to demand more interest on loans. Gibson's paradox is not a paradox at all. It is a natural consequence of basic supply & demand.
Notice that this is a one way analysis: Inflating the money supply creates a force to increase interest rates. The reverse is not true. Lots of things can work to increase interest rates that do not result in increased inflation.
Furthermore, inflating the money supply only creates a force to increase interest rates. There could be countervailing forces working to decrease interest rates (like Fed manipulation). In practice, we can see some of these forces work themselves out in weird yield curve shapes - like inversions.
What do you think about Gibson's paradox? i.e. that higher interest rates will pull up inflation. agree? disagree? Investment in the US is not dissimilar to consumption in my view and thats what is needed to resolve supply etc
I don't believe Gibson's paradox holds up unless there is a gold standard and market interest rates. When Alfred Gibson gathered his empirical evidence to come to his conclusion on interest rates and inflation, he was looking over data that was influenced by market interest rates and the gold standard. Now we have the Fed set interest rates for the market and no tether to gold what-so-ever. I think our best guide to the current inflation is the mid-70s through the early 80s, when there was no longer a connection to gold and the Fed set interest rates.
Gibson's paradox is a correlative observation that does not really explain anything. It's crucial to understand that inflation is not directly an interest rate phenomenon. Inflation is the increase in money supply. The increase in the money leads to a devaluation of money. The decrease in money value leads lenders to demand more interest on loans. Gibson's paradox is not a paradox at all. It is a natural consequence of basic supply & demand.
Notice that this is a one way analysis: Inflating the money supply creates a force to increase interest rates. The reverse is not true. Lots of things can work to increase interest rates that do not result in increased inflation.
Furthermore, inflating the money supply only creates a force to increase interest rates. There could be countervailing forces working to decrease interest rates (like Fed manipulation). In practice, we can see some of these forces work themselves out in weird yield curve shapes - like inversions.